Stimulus Response

The White House is apparently considering additional fiscal stimulus:

Aug. 17 (Bloomberg) — President Barack Obama plans to ask Congress for billions of dollars in fresh spending to boost the economy and reduce unemployment, with a new focus on helping the long-term unemployed, an administration official said. The president also will call for long-term cuts beyond the $1.5 trillion that Congress has charged a 12-member bipartisan “super-committee” of lawmakers to trim by late November, the official said.

The dollar amount of the additional long-term deficit reduction measures will exceed the cost of the short-term spending that he will propose, said the official, who requested anonymity because plans for the speech haven’t been completed. According to the official, Obama plans to unveil his priorities in a speech in early September and propose a mix of tax cuts and infrastructure spending, including extending two measures that expire at the end of the year: the two-percentage-point payroll tax cut for workers and unemployment insurance benefits.

Econ prof Steve Suranovic has posted a two part series on the dangers of debt. Part I is here. Part II is here.

For a stronger, more direct indictment of fiscal stimulus see ZeroHedge.

I think it’s about time that I laid out my views on fiscal stimulus.

1. I believe on theoretical grounds that a properly constructed fiscal stimulus can produce economic growth in excess of the amount of the stimulus itself by boosting aggregate demand. (i.e. can have a positive multiplier)
2. I believe on empirical grounds that improperly constructed fiscal stimuli can have zero or negative multipliers.
3. It is possible for fiscal stimulus to have social benefit in the form of doing things we want to do or economic benefit in the form of residuals, i.e. useful infrastructure spending.
4. It is also possible for a fiscal stimulus program to have no lasting social or economic benefits. The money can just be pissed down the drain.
5. The empirical evidence suggests this is just what happened.
6. The stimulus plan of 2009 was not properly constructed. It was too much a grab bag of Congressional hot buttons.
7. It is very difficult, possibly impossible, for Congress to construct a fiscal stimulus package properly.
8. The empirical evidence of the effectiveness of fiscal stimulus in producing a self-sustaining recovery is weak, cf. Japan.
9. None of the foregoing per se means that we shouldn’t engage in fiscal stimulus.
10. We are currently engaging in fiscal stimulus to the tune of roughly 10% of GDP.
11. That is likely to continue for the foreseeable future.
12. Total public debt is near or at 100% of GDP.
13. Primary default occurs when you must borrow to pay the interest on the public debt.
14. There is no realistic prospect of our paying down the present public debt to manageable levels.
15. We are presently paying about $500 billion per year in interest on the debt.
16. Double that and we have reached primary default.
17. Increasing the level of fiscal stimulus beyond the present 10% will hasten primary default.
18. Unless the economy has a growth spurt and all other things being equal a fiscal stimulus of an additional 10% would result in primary default in five years.
19. Primary default will occur even faster if interest rates rise.
20. Getting out of the hole by minting more money is courting a loss of confidence in the currency and hyperinflation.
21. Getting out of the hole by taxing more is risking a collapse in the economy. We’d need to raise almost three times the revenues we have now.
22. You can’t accomplish that with taxes on “the rich”.
23. There’s an impasse on the major expense items, e.g. defense, Medicare, Social Security.

Under the circumstances I think that it is incumbent on anyone who proposes additional fiscal stimulus to be very specific about how the money will be spent, for how long he or she plans to spend it, and what he or she expects it to accomplish. The long term is getting shorter all of the time.